Corporate Governance and Business Ethics

What is business ethics?

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Business ethics is the field of study that is concerned with standards and principles that guide the behavior of firms in executing their business (Ferrell, Fraedrich and Ferrell, 2011). In management, business ethics is concerned with issues of what is acceptable or unacceptable behavior within an organization; as such business ethics evaluates the decisions of a firm to establish whether they adhere to morally acceptable standards (Ferrell et al, 2011). On the other hand, shareholders expect that management will discharge their stewardship responsibility sincerely and dutifully while employees expect that the organization will provide a safe working environment and a fair return for their effort. Finally, society at large expects the organization to preserve the environment, pay taxes fully, and protect the rights of employees, and not to engage in unfair business practices that are detrimental to society’s wellbeing.

Isn’t business ethics simply a function of personal ethics? What role can the organization play in adopting sound business ethics?

The answer is yes and no; yes because businesses are composed of people and the behavior of each impact on the organization. According to Ferrell et al (2011), the key influences of business ethics are individual employee’s values, the influences of the immediate supervisor or management action, and the influence of friends or co-workers. What this means is that business ethics are strongly influenced by the beliefs, principles, and ethics possessed by individuals within the organization. Ferrell et al (2011) further also identified that the main causes of unethical business behaviors within organizations are influenced by pressures to meet aggressive performance targets, strict deadlines, and a need to surpass profits. This also demonstrates that the actions of individuals acting for personal goals or the organization normally impact the overall ethics of the firm.

Because an organization is a distinct entity with its legal status, duties, and responsibility under the law, the ethics of individuals who constitute the organization should not necessarily be taken to be representative of the organization’s ethics. An organization should have its distinctive code of ethics that is binding to all employees irrespective of their personal beliefs or code of ethics.

What is an ethical issue and how does it differ from an ethical dilemma?

An ethical issue is a decision that requires a person to choose between two alternatives based on a criterion of which is right or wrong (Ferrell et al, 2011). It is a situation where there is a conflict between two parties or issues and a person is required to choose the moral option between them. In organizations, ethical issues are concerned with issues such as conflict of interest between individuals and organizations. There is a need for honesty and fairness in organizations business processes, communications, and in relationships between organizations and its various stakeholders

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Ethical dilemma on the other hand is concerned with two moral issues in which the selection of one moral option causes unethical outcome within the other issue not chosen (Ferrell et al, 2011). Under such circumstances, the decision is made by considering which amongst the issues is the most beneficial or has a minimal negative impact.

What is a foreseeable ethical issue for Nine Carat Limited? Explain why this is considered an ethical issue.

Nine Carat Limited employees who are involved in the acquisition of land for exploration are involved in kickback schemes whereby they pay brokers to help them gain access to land. This is an ethical issue because bribery, in general, is illegal and more so according to the laws of Australia and Nine Carat Limited’s policy. Employees have engaged in illegal activities that are in direct conflict with the company’s interests and against the wishes of shareholders, other employees, and the local communities.

What is a foreseeable ethical dilemma for Nine Carat Limited? Explain why this is considered an ethical dilemma.

Nine Carat Limited has a foreseeable ethical dilemma that is imminent; this is because the project finalization and replenishment managers of the organization do not appear to have fulfilled the legal requirements regarding the rehabilitation of former mines as set by the environmental protection authority. This is an ethical dilemma because if the organization insists that this be carried out consistent with the law, the projected profits of the company will significantly be reduced and this will affect future expansion plans of the project which might threaten its survival. At the same time failure to implement the requirements set by the Environmental Protection Authority without an official declaration is unethical, immoral, and unacceptable. Nine Carat’s rapid growth in revenues, assets, and profitability has been achieved partly due to its avoidance of legal obligations and this should not be justified on that basis.

Use Figure 2.3 on p. 39 of the text by Ferrell, Fraedrich, and Ferrell (2011) to outline the four steps that Nine Carat Limited should take to become socially responsible.

Social responsibility is based on the principle that every organization should seek to maximize the positive benefits of all its stakeholders while at the same time seeking ways to minimize all negative effects to its stakeholders; social responsibility has four dimensions, legal, economic, ethical, and philanthropic (Ferrell et al, 2011). The steps that Nine Carat Limited can take to become socially responsible are as follow; undertake legal dimension activities, ethical dimensions, economic activities, and philanthropy issues.

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The legal dimension refers to an organization obeying all the laws and regulations that have been established by the government and non-government agencies (Ferrell et al, 2011). Nine Carat should for instance start adhering to the laws of the Australian government and the laws prescribed by the Environment Protection Authority; more specifically, the company’s policy should prohibit bribery and put in place measures to punish those found engaging in such acts. The company should also ensure it fulfills the requirements regarding the rehabilitation of the mines to such conditions specified by the environmental protection authority.

The ethical dimension is where the behavior of the organization is aligned with its stakeholder’s aspirations and expectations (Ferrell et al, 2011). Thus, the activities of the organization should reflect the wishes of all the stakeholders in the organization which means that the Company must address all issues raised by dissenting stakeholders. The company should specifically address the issue of bribery and lack of compliance with environmental standards in this category. Additionally, the company should be honest and inform shareholders that it has outstanding obligations to the Environmental Protection Authority, which if honored will change the profit outlook significantly.

Economic responsibility is concerned with the organization delivering a fair monetary return to all its stakeholders (Ferrell et al, 2011). Nine Carats should limit its rapid expansion in assets and revenues and instead focus on achieving moderate but realistic growth and profits which are ethically and honestly generated.

Philanthropy entails an organization giving back to the community that it operates in (Ferrell et al, 2011). This implies that Nine Carat should give back to the community by donating part of its profits to schools, hospitals, and other social goods. The company can also financially help the less fortunate in society such as the disabled, sick, or terminally ill patients.

How will invest valuable resources into formulating a code of business ethics and thereby achieving social responsibility likely to support the bottom line?

Social responsibility entails the use of scarce resources to benefit stakeholders or society at large. Although social responsibility does not directly contribute to profitability or revenues it can indirectly affect profitability and revenue growth in the long term. In general social responsibility, programs create satisfaction amongst the stakeholders of the organization; when stakeholders are satisfied, they are likely to increase their contribution to the organization. For example, if employees are satisfied, they are likely to deliver high-quality goods and services. This is likely to result in higher customer satisfaction, high sales, and eventually high profitability. Shareholders will in turn benefit from higher dividends and stock growth; thus, this proves that social responsibility if properly executed can contribute to the company’s bottom line.

Identify Broadway Corporation’s primary and secondary stakeholders. Explain why you have classified them in this way.

To determine which category that the various stakeholders mentioned in the case scenario fall in we must be able to understand what constitutes stakeholders and differentiate between primary and secondary stakeholders. Stakeholders are defined as “people or groups interested in a project, program or company” (Ehow.com. 2011): in this case the Broadway Corporation stakeholders include its business partners, target consumers, employees, and all other parties that are interested or have a stake on the Company. The nature of stakeholder’s interest, relationship with Broadway Company, and level of their investment is what determines the type of that stakeholder; consequently, these are the criteria that we shall use to differentiate between primary and secondary stakeholders of Broadway Company.

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More specifically, primary stakeholders are those parties to a project that has a direct interest and is central to its implementation who will mostly benefit or be impacted by its implementation (Ehow.com, 2011). As such based on the case analysis of Broadway Company the primary stakeholders based on this definition are three; the Companies employees, its target market, and Broadway Company shareholders. The Broadway Company employees who Kent is one of them are the major primary stakeholders as they are involved daily in ensuring the success of the project. As a result, its failure or success will have significant implications for both the Company and its employees. Other primary stakeholders of the Company are the product consumers as they directly determine the failure or success of game products that are designed by the Company as well as the Company’s shareholders as they have committed funds to ensure that the Company succeeds in its projects.

Based on the same analysis the secondary market will be Las Cruces town where the Broadway Company is based, the government of Mexico which the Company pays taxes to, activist groups especially those concerned with business ethics and social morals, and its competitors such as the Taiwanese joint venture group which it is considering selling the game and the machines and finally Kent’s family. These are secondary stakeholders because they are indirectly affected by the Broadway project activities in one way or another and are unlikely to be drastically affected if Broadway ceases functioning. The activist groups are relevant in this case as this project involves potential ethical issues that might antagonize such activist groups.

What is the role of stakeholders in business ethics? Provide (2) two examples of the role the stakeholders might have in Broadway Corporations.

In modern Companies, the role of stakeholders has become central to the issues of business ethics which they must determine through their influence (Griseri and Seppala, 2010). This means that the various stakeholders have specific roles that they play to ensure that organizations uphold acceptable business ethics in their business processes. In the same way, Broadway stakeholders must play under the circumstances that the Company has found itself in as far as the development of the Lucky game project is concerned. There are various ways in which Broadway Corporation stakeholders might act in influencing their Companies business ethics; one, of the most strategic stakeholder in Broadway, are the shareholders and the Company’s employees and management. Because of their strategic position, this group of stakeholders is best placed to influence the Companies business ethics directly by influencing a business strategic shift that is different from what is currently being pursued by the Company in designing the games.

Suffice it to say that Broadway’s current lack of business ethics is a result of management decisions and stakeholders’ interest to pursue gaming options that incorporate gambling, violence, and now immoral issues in its design in the first place. In the same way, the Company’s management, notably Brad and Kent backed by the shareholders can now proactively veer off from designing this form of gaming products and have them redesigned differently under acceptable business ethics.

Secondly, the government and other concerned activist groups can come up with an acceptable code of practice that is meant to regulate Companies in the gaming industry by putting in place institutions that play the roles of watchdogs with intention of promoting ethics in businesses

Discuss the unethical behavior in the case using the four factors of the ethical decision-making framework in Figure 5.1 on p.128 of the textbook. Assume also, that Broadway Corporation will develop and distribute the new game “Lucky” as advised by the President.

Several unethical issues are evident in this case scenario of Broadway Corporation, and because ethical issues are mostly relative, in this regard we shall strive to identify the most universal unethical issues that are most obvious. First, Kent has deliberately designed the games to be addictive by incorporating elements of gambling, violence, and sexual appeal with full consent by the management of the Company. Secondly, the way that the game has been programmed by Kent is what can be referred to as a win-lose situation since at no time can the players expect to win more than they have put in no matter what. Finally, the latest element of nudity and sex appeal that the game portrays is dangerous considering the target market of the Company’s gaming product. The majority of the consumers which the Company is targeting through the use of these tactics are young people at the very age of their lives. It is from that perspective that the seriousness of the game’s portrayed vices can be seen to be extremely unethical which could have very adverse effects on the subject’s behaviors in their later life.

Now based on a framework developed by Ferrel et al (2011), that seeks to explain the resulting ethical or unethical behavior in an organization we can be able to determine the nature of business ethics that are present in this case. First, we use the criteria of “ethical issue intensity”; based on what we have already analyzed in the section above we can reliably assert that the intensity of unethical issues, in this case, are high which are not less than three as we have seen. We can therefore conclude that there is no doubt that there exist unethical business practices in every aspect of the gaming products developed by Broadway Company.

The second criteria is that of “individual factors”; in this case, we realize that both Kent and Brad’s ideas of how the games should be designed have greatly shaped the final game products that were eventually developed by the Company. Thus, we can also conclude that the individual values and personality factors of the individuals that were directly involved in the design of the product greatly contributed to its unethical elements. Thirdly, we have “organizational factors” which means organizational strategic business plans and probably its overall core values; these can best be considered by analyzing the organization’s shareholders’ position as well as employees and management position regarding its business activities.

In this case, it must be obvious that the management as well as the shareholders have consented to the design of the games that Kent has been developing for the Company despite the glaring unethical issues that are evident in the games which is a reflection of the overall organization values and culture. But on the other hand, organizational factors of Broadway Company demand that it be creative and aggressive in designing the gaming products for it to survive in the industry; this factor must also have influenced the current game design. Finally, there is the “opportunity”; no doubt that Broadway went to great lengths that were unfortunately in its methods to capture the targeted young people through the use of all methods ethical or not to ensure the game is addictive with the sole intention of increasing its bottom line profits with complete disregard to the welfare and the harm that such games were likely to cause. As expected and according to the model of understanding ethical decisions, the resulting decision is seen to be unethical.

Use the Connect database (available at the CQUniversity library website) to access the annual report of one (1) company. Outline the main recommendations of Principles 1, 4, and 6 of the ASX Corporate Governance Principles and Recommendations and discuss the extent, or otherwise, your chosen company has complied with those Principles. Include examples and or quotes from the report to support your discussion.

The Company that I chose to undertake a review of its annual report as far as issues of corporate governance are concerned is called Adcorp Australia; Adcorp is a service delivery media Company in the advertising industry which describes itself as a “full-service advertising agency and sector-based communications specialist” (Connect4.com, 2011). Its major business activities involve client advertising, brand strategy marketing development, and design of creative media plans among others (Connect4.com, 2011). Consistent with the framework of the ASX Corporate Governance Principles, Adcorp has listed all the eight principles and detailed the actual activities through which it has achieved compliance in these areas. In the following section, we shall undertake a review of Adcorp compliant with corporate governance principles 1, 4, and 6.

Lay Solid Foundations for Management and Oversight

As aptly summarized above the issues that principle 1 intends to cover are mainly three; one, disclosure on delegation of duty between the Company’s board and organization management, two, provision of the performance review procedures used in appraising the senior executives, and finally the position of the Company regarding the two issues (Transurban.com.edu, 2011). In Adcorps financial statement of 2010, the Company has diligently outlined these issues and stated about the first requirement that “the primary role of the Board is the protection and enhancement of shareholder value” which it claims is achieved through adherence to “board charter” that has been created by the board (Connect4.com, 2011). More specifically Adcorp’s financial statement asserts that the primary role of the board is “ensuring that management objectives and activities are aligned with the expectations and risks identified by the Board” (Connect4.com, 2011). The Company goes on to list the various other functions that the Board has and how it undertakes them but that is as far as it goes; what is missing is a description of a performance review plan that is used by the Company with its executive management personnel.

Safeguard Integrity in Financial Reporting

Under this principle three things are recommended; creation of an audit committee by the Companies, description of its structure, and development of a charter on which the audit committee is governed (Transurban.com.edu, 2011). All these should be listed in the annual financial report of all companies in which these three aspects are be detailed. Based on the same financial report, Adcorp indicates that it is compliant with this principle because it has in place an audit committee governed by a charter that has been endorsed by the board. This identifies as having the general mandate of “verifying and safeguarding the integrity of the Company’s financial reporting independently” which also lists its specific functions and briefly states its non-executive members (Connect4.com, 2011). However, what Adcorp has failed to do regarding this matter is to provide the actual charter that governs the audit committee and other details such as meetings held and procedures for appointing its members.

Respect the Rights of Security Holders

Based on this principle, a Company is expected to formulate a communication policy that is intended to facilitate the process of communication between shareholders and the Company’s management and make public such policy (Transurban.com.edu, 2011). This is the only requirement under this principle which Adcorp is seen to be compliant because it lists four specific areas through which the Company directly enhance and facilitate communication between itself and the management. This is one of the only areas mentioned in which we see that Adcorp has fully complied with this principle in full.

Differentiate between Agency Theory and Stakeholder Theory as discussed in the readings by Psaros (2009). Provide evidence of the application of each of these theories in the ASX Corporate Governance Principles and Recommendations.

Stakeholder theory refers to the school of thought that has recently emerged in which the “idea of stakeholders” is at the center of an organization and crucial in understanding the concept of business ethics (Heath and Norman, 2004). According to this theory firms have equal obligations to all its various stakeholders regardless of their importance which must be driven by their need to achieve business ethics. On the other hand Agency theory is concerned with the study of the nature of the conflict that exists between various stakeholders of a firm which it recognizes to be existent.

As such these two theories are fundamentally different in that one discusses how business ethics can be achieved by consideration of all the stakeholders while the other sees the difficulty of achieving ethics in business because of the conflicting stakeholder’s interest in the firm. In the ASX Corporate Governance Principles, these two theories are evident in the way that the guideline advocates and promotes business ethics that are supported by all the Company’s stakeholders while at the same time outlines in principle 7 the need to “recognize and manage risks” (Transurban.com.edu, 2011).

References

Connect4.com. 2011. Thomson Reuters: The Annual Report Collection. Web.

Ehow.com. 2011. The Difference Between Primary and Secondary Stakeholders. Web.

Ferrell, O.C., Fraedrich, J. & Ferrell, L. 2011. Business Ethics: Ethical Decision Making and Cases 8th Ed. Oklahoma: South Western Publishing.

Heath, J. & Norman, W. 2004. Stakeholder Theory, Corporate Governance and Public Management, Journal of Business Ethics 53: 247-265.

Transurban.com.edu. 2011. ASX Corporate Governance Principles and Recommendations Checklist. Web.

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